Comment: Before you invest in the SPAC boom, here are some things to evaluate
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The amount of money that specialist companies have raised over the past year has increased.
SPACs are an alternative way for companies to go public that differs from a traditional IPO in terms of process, speed, disclosure, and regulatory requirements.
The most important participants in SPACs include SPAC sponsors and investors in the SPAC IPO. This also includes institutional funding, which often comes when the SPAC merges with a private company to take it public, as well as investors who own the new company in the long run.
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Here are some tips for investors to consider:
- There are large transfers of wealth from some SPAC participants to others;
- The SPAC boom could bring earlier, riskier companies to market. and
- While the absolute returns have been high for buy-and-hold SPAC investors, this is less the case when considering investment alternatives in an emerging market.
There are many ways to get involved in SPACs with different expected returns. Here is a look at the return analysis of completed and liquidated SPAC IPOs since January 2019, which includes 85 completed SPAC IPOs and five SPAC liquidations. The SPAC participants were analyzed using returns on an absolute basis and in relation to investment alternatives such as traditional IPOs.
- SPAC sponsor The yield estimates are inaccurate due to various variances but, given our estimate of their share awards relative to upfront cost, even after taking into account foreclosures, concessions and exercise provisions, they appear extremely high. The only likely way for sponsors to lose money is if their stock values fall below their upfront cost after the merger or if SPACs are liquidated without a merger.
- “SPAC Arb Investors.” Prior to the merger, SPAC investors can redeem shares for cash if SPAC prices fall or sell them in the secondary market if shares rise. You will also receive warrants in the new company. A “SPAC Arb-Investor” is one who we believe will exercise this option each time by exiting stocks and guaranteeing positions immediately prior to the merger. The returns from SPAC Arb were very attractive even for weaker businesses with 100% redemption rights.
- Buy-and-hold investors They are expected to retain their positions post-merger and include SPAC buyers upfront, institutional investors funded at the time of the merger, and buyers after the merger. The absolute buy-and-hold returns were high (with the exception of the worst performers). However, in rally markets, investors should always consider what other investments they could have made. Most of the companies that went public through SPACs lagged the traditional IPO and Russell 2000 Growth benchmarks. This is especially true for deals more than 180 days since the merger, after which private equity holders of the target company can sell their shares.
The spread of absolute and excess buy-and-hold returns is enormous. As a result, depending on the SPACs in which they have participated, investors could see returns significantly higher or lower than the mid or average returns. In principle, active management could create considerable added value in this market.
The industry analysis highlighted the significant wealth transfers taking place with the SPAC ecosystem: from buy-and-hold investors to SPAC arb investors and from public companies to SPAC arb investors and sponsors.
Why might selling companies provide these subsidies? The main driver of the SPAC boom could be its launch rather than cost – most SPAC mergers since 2019 involve companies with negative free cash flow, although this is also common in the traditional IPO market.
Overall, SPACs have usually been a great investment for sponsors unless mergers have not gone through and SPACs have been liquidated.
For SPAC Arb investors with low-risk options and free warrants, they are very convincing. For everyone else, there have been good absolute returns so far, but rising tides in bull stock markets are lifting all boats. Sponsorship and SPAC Arb returns are unlikely to remain high indefinitely. Experience shows that they are ultimately reduced by lower subsidies, more exercise rules for sponsors, and a higher risk of business failure.
The most interesting part to watch: how many of the 300+ SPACs outstanding will be able to find a company that can go public at a reasonable price to avoid large SPAC withdrawals upon closing a Ensure adequate institutional backstop funding and complete a merger.
This upcoming universe is more than three times the size of the universe of completed fusions we have analyzed. As a result, the book on SPAC risks and returns for investors is not yet finalized.
– Posted by Michael Cembalest, President of JP Morgan Asset Management’s Investment Strategy